A tough market for home buyers is becoming increasingly difficult as the combination of rising prices and rising mortgage rates make it even harder to afford a home, new data shows.
Despite these challenges, people are still buying homes. About 4 million copies are sold every month. But to a shocking extent, rising mortgage rates and the lack of homes for sale – leading to rising prices and bidding wars – have weakened their financial health.
People are now borrowing significantly more money for homes at significantly higher interest rates than they were just a few years ago. Overall, a homebuyer’s dollar is about half what it was at the end of 2020.
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In December 2020, mortgage rates reached some of their lowest levels, with 30-year fixed financing available for 2.68%. That was a sharp decline from 3.78% the previous year.
Government-backed lender Fannie Mae today says the average interest rate for a 30-year fixed-rate mortgage is 7.63%.
Prices have also skyrocketed. The average sales price of a single-family home is over $416,000 in the second quarter of this year, up from just under $360,000 at the end of 2020.
In some ways, U.S. housing price indices are at all-time highs.
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Lawrence Yun, chief economist for the National Association of Realtors, said that at the end of 2020, the monthly mortgage payment for a typical, newly sold home was about $1,100 in principal and interest. Now it’s about double.
The NAR calculates that a buyer today needs to earn $107,232 per year to afford this average home. This calculation is based on current rates for a buyer who makes a 20% down payment and spends 25% of their gross monthly income on housing costs.
This is somewhat conservative since many people spend more than 25% of their budget on these costs. And real estate prices fluctuate greatly in the USA. But it still shows how much harder it is to afford a house and feel financially secure.
According to the U.S. Census Bureau, the real median household income in 2022 was $74,580.
“Unless you make six figures, it becomes really difficult to afford a house in many markets,” Yun told NBC News.
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Find out affordability
Another way to measure change: The NAR also publishes a monthly housing affordability index. A typical value, Yun said, is 120 – meaning a person with an average income has enough money to buy a home about 20% above the average price.
That number has fallen from almost 170 pre-Covid to a provisional total of 91.7 in August. This is the lowest value since October 1985.
According to Yun, part of the problem stems from the housing crisis of 2006 to 2008, which triggered the Great Recession and the Global Financial Crisis. Many smaller homebuilders failed, the surviving builders became more conservative, and combined with rising regulatory costs, this depressed construction activity for a full decade.
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That’s one reason there are fewer homes for sale than usual. Another reason is that in many cases, people who already own a home and are paying mortgage interest rates in the 3% to 4% range are not interested in selling and buying a new home for close to 8%.
The difference between a 3% monthly mortgage payment and one at 8% can be staggering. For an average-priced home that costs $416,000 with a 20% down payment, your monthly mortgage at 3% interest will be $1,403. At 8% interest, it’s $2,441.
Many people are excluded from the housing market, which also makes rent more expensive. According to Yun, there is at least some good news there.
“Fortunately, at least on the rental side, they are building apartments in many, many cities,” Yun said.
He added that there were also some positive signs for home builders. The stock prices of companies like Toll Brothers and NVR — the parent company of Ryan Homes, NVHomes and Heartland Homes — have skyrocketed in the last year, meaning investors want to give these companies cash that they can use to build more homes. That alone won’t solve the affordability problem, but it would probably help.